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Mar 27, 2018, 08:30am

The Advantages Of Investing In Real Estate For Big Tax Savings In 2018

Kent Clothier, a national leader in the real estate investing industry, is the Founder and CEO of Real Estate Worldwide (REWW).

The Tax Cuts and Jobs Act has changed the dynamics of our finances and the profitability of investments. While much of the press coverage around the new rules has been on its drawbacks, there exist some positive financial opportunities for those who educate themselves and act on new breaks.

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The new tax law both protects some crucial breaks and provides new ones. Some of these give real estate investors great advantages in building wealth and passive income and keeping tax liabilities down. For those already feeling the pressure of filing income taxes and who may be cringing in anticipation of meeting with their accountants, there is hope — especially for those who expand real estate investments or get started with real estate investing in 2018.

While the Tax Cuts and Jobs Act (TCJA) was one of the most controversial and confusing legal and tax changes in decades, and with some headlines making the changes sound like tax armageddon for those living in high-cost states like New Jersey, New York and California, the TCJA may actually bring many benefits to those who learn how to use them and seek out professional advice.

Who wins and loses will depend a lot on personal money moves made in the next few weeks, and accounting and tax advisors providing strategy and tax preparation services. As we dig further into the facts and some of the lesser-known provisions of the new law, many may be surprised to find that buying real estate in 2018 can make all the difference in how big tax bills or refund checks are over the next five years.

Bonus Depreciation For Business Owners And Real Estate Investors

The TCJA has opened a new window of opportunity for investors and property buyers to enjoy a 100% first-year bonus depreciation deduction. This break is retroactive for 2017 tax filings on property acquired and in service by September 2017. This break will be available until 2022, when it begins to be reduced by 20% per year until phased out.

The bonus depreciation deduction on improvements to real estate may apply to rooves, air conditioning and heating systems, ventilation, alarm systems, fireproofing and more.

Reduced Corporate Taxes

One of the biggest changes in the Tax Cuts and Jobs Act is the cut to the corporate income tax rate. It is now just 21%, down from a maximum rate of 35%. The TCJA has also made it far more attractive for corporations to bring back money from overseas and reinvest it in the U.S. New rates for repatriating and reinvesting money at home go as low as 8%.

Additionally, pass-through income from business entities such as LLCs now gets a 20% deduction on qualified income. This allows successful existing real estate firms to expand and enjoy better profitability while making it more appealing and advantageous to launch new real estate startups or get started in real estate investing through legal entities like limited liability companies.

1031 Exchanges

Internal Revenue Code Section 1031 allows real estate owners to trade up or diversify their investment portfolios without taking any immediate tax hit. These capital gains tax-deferring benefits have also been protected in the tax law overhaul. With the new income and depreciation breaks and other less-friendly parts of the TCJA, this may a crucial time to restructure real estate portfolios to reduce tax exposure, while setting up years of compounding gains and double-digit tax savings.

Retirement Account Investments And Contributions

One of the most critical sets of tax benefits saved in this tax law overhaul are those related to longer-term savings and investments. This includes contributions to Education Savings Accounts (ESAs) and Health Savings Accounts (HSAs), though most notably it applies to contributions and investments made in 401(k) plans and IRAs.

Depending on which type of account is used, individuals can enjoy immediate reductions to taxable income and decades of tax-deferred gains or tax-free investment gains. While the stock market and cryptocurrencies may have recently given retirement investors a scare, rolling over to self-directed retirement accounts can help supersize allowable contributions, allow catching up on savings and enable investment in real estate. These accounts can be used to invest directly in real estate, real estate businesses, private mortgages and mortgage loans notes, partnerships and IRA LLCs or real estate IRAs.

Conclusion

Many rules have changed with the passing of the Tax Cuts and Jobs Act. Some important ones didn’t change. Some individuals need to urgently act to avoid a harsh tax hit this year and looking forward. This is especially true for those with new limitations on state and local income taxes and in high property tax states, though others may benefit under the new rules. While much remains complicated, one thing is clear: The advantage will go to those who make smart business and real estate investments sooner rather than later. There are many opportunities out there. Speak to your tax accountant, financial planner and real estate advisor, and get customized advice for your unique situation. Then act promptly.